Two related factors threaten the continued economic expansion: global trade uncertainty and business capital expenditures. The stock market never likes uncertainty and while the President keeps the world informed as he plays hardball in trade discussions with other nations, the results of those negotiations remain unknowable.
Most would agree that Trump’s tweeting is both unprecedented and disruptive. Beyond that, there appears little consensus about the merits of his communication style. For investors attempting to glean clues about the future, the oscillating announcements create uncertainty. And that leads to market volatility, also known as “headline risk.”
Also impacting international trading patterns is Brexit: The United Kingdom (UK) leaving the European Union (EU). No one knows for sure how that issue will be resolved. While there was a referendum in 2016 that called for Britain to leave the European Union, and the UK provided the required Article 50 notification in 2017, politicians cannot agree on how to make that happen.
Global trade discussions have not impacted consumer spending, which continues apace in the United States. Economic growth is still positive at rates close to what we’ve averaged over the past decade. Unemployment and inflation are at or near record lows (good for the economy) Corporations continue with mostly profitable operations.
But while all the fundamentals are fairly solid, the one struggling component is capital expenditure, CapEx for short. And this is due to the uncertainty vis-à-vis global trade. Until we get some firm resolution on global trade it is unlikely that businesses will be comfortable making large long-run capital investments.
Which leads us to the opinion that we can expect this expansion to continue for the foreseeable future while anticipating heightened volatility. As John Lynch, LPL Financial’s chief investment officer, says “CapEx represents about 20% of our economy but 80% of its volatility”.
We continue to monitor economic developments and make adjustments as necessary. We are using social media in addition to our periodic client checkups to keep our clients informed, as we navigate these interesting times.
The opinions voiced in this material are for general information only and are not intended to provide specific advice of recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.envision